Navigating Bankruptcy When You Own Cryptocurrency

Bankruptcy is already a complicated process, but adding cryptocurrency into the mix creates even more uncertainty. Many people entering bankruptcy today hold Bitcoin, Ethereum, or other digital assets. The question most ask is simple: what happens to my cryptocurrency if I file?

The truth is that cryptocurrency is treated very differently than cash in the bank or a car in your driveway. Courts consider it property, which means it must be disclosed, valued, and possibly liquidated. Because crypto is volatile, hard to track, and stored in digital wallets, it presents unique challenges that debtors cannot afford to ignore.

This article breaks down exactly how cryptocurrency is handled in bankruptcy, from disclosure and valuation to tax treatment and trustee oversight. By the end, you’ll understand both the risks and opportunities of owning crypto during bankruptcy and the steps you should take to stay compliant while protecting your financial future.

Why Cryptocurrency Matters in Bankruptcy

Bankruptcy law requires every filer to list all assets. This includes homes, vehicles, bank accounts, and increasingly, cryptocurrency. What makes crypto unique is its constant price fluctuation and the way it is stored and traded.

Courts treat cryptocurrency as property, not currency, which means it must be disclosed and valued during your case. For some debtors, crypto may be a small holding, while for others it could significantly impact how the case proceeds. Either way, hiding or ignoring it is not an option.

“Under 11 U.S.C. § 521, debtors must fully disclose all assets including cryptocurrency when filing for bankruptcy.”

Disclosure of Cryptocurrency in Bankruptcy

Every debtor must disclose all types of cryptocurrency, regardless of whether it is in an exchange, a private wallet, or connected to mining activity.

Full disclosure includes:

• The type and quantity of cryptocurrency owned.
• The value at the time of filing.
• Any wallets, private keys, or exchange accounts.
• Mining equipment or income from mining operations.

Failing to report these assets could be considered concealment. That may result in denial of discharge, or even allegations of fraud. Courts and trustees use blockchain technology to track transactions, so assuming cryptocurrency is hidden or anonymous can be dangerous.

A Milwaukee bankruptcy attorney familiar with digital assets can explain how local courts view crypto disclosure and help you avoid mistakes that could affect your case.”

“Trustees and courts are increasingly sophisticated in tracking crypto transactions. Non-disclosure can lead to serious legal consequences.”

Valuation Challenges and Solutions

Unlike bank accounts or property, crypto values change minute by minute. This makes valuation complex in bankruptcy cases. Prices can vary across exchanges and may swing dramatically in just a few days.

Courts often rely on reputable price aggregators or averages over a specific period. Attorneys may document the exact exchange rate used and provide updates if the market changes significantly. The goal is to present a fair and transparent valuation to the court.

This process mirrors the valuation of stocks, but volatility in crypto is usually higher, making accurate documentation even more critical.

Handling Wallets, Private Keys, and Custody

One of the biggest differences between crypto and traditional assets is custody. With a bank account, a trustee can request records. With cryptocurrency, access often depends on private keys and digital wallets.

Debtors may be asked to provide information to the trustee. In some cases, a third-party custodian may be used to secure assets until the case is resolved. Transferring cryptocurrency without court approval could violate bankruptcy rules, so understanding this step is important.

Maintaining organized records of transactions, wallet addresses, and private keys helps reduce complications and avoids unnecessary disputes during the process.

Tax Implications of Cryptocurrency in Bankruptcy

The Internal Revenue Service (IRS) treats cryptocurrency as property, not cash. This has several implications:

• Selling or exchanging crypto creates capital gains or losses.
• Mining income is considered self-employment income.
• Receiving cryptocurrency as payment counts as taxable income.

Even during bankruptcy, you must report all crypto-related income and losses on tax returns. For full details, see IRS guidance on virtual currency. Accurate records are critical, as the IRS expects detailed transaction histories.

“IRS Notice 2014-21 treats cryptocurrency as property, which means gains, losses, and mining income must be reported during bankruptcy.”

Myths About Anonymity in Crypto

Many believe cryptocurrency is anonymous, but blockchain transactions leave a permanent record. While wallet owners are not always immediately identifiable, trustees and investigators have advanced tools to trace ownership.

This means attempting to hide assets through crypto is not only illegal but likely to be discovered. Courts take concealment seriously and may impose harsh penalties, including denial of discharge.

Benefits and Risks of Owning Cryptocurrency in Bankruptcy

Owning digital assets can sometimes help, but it also brings added challenges.

Benefits:

• Crypto may increase in value during the course of proceedings.
• Demonstrating financial literacy may reflect positively in some cases.
• Digital assets may support financial recovery after discharge.

Risks:

• Trustees may liquidate assets at an unfavorable time.
• Exemption planning is complicated because crypto does not always fit neatly into categories.
• Trustees may scrutinize cases with crypto holdings more closely.

In Wisconsin, debtors may choose between state and federal exemptions. How cryptocurrency is categorized under these exemptions varies, and seeking guidance is often necessary.

Comparison: Cryptocurrency vs. Traditional Assets in Bankruptcy

FAQs

Do I have to disclose cryptocurrency in bankruptcy?

Yes, all cryptocurrency must be disclosed. Bankruptcy law requires full transparency, and failing to list assets can lead to denial of discharge or fraud allegations.

How do trustees determine the value of cryptocurrency?

Trustees typically use reputable price aggregators or averages across exchanges. They may adjust values if the market shifts significantly during the bankruptcy case.

Can cryptocurrency be exempted in bankruptcy?

Possibly. Wisconsin filers may choose state or federal exemptions, but how crypto fits into these exemptions depends on individual circumstances and how the asset is categorized.

Will the court take my cryptocurrency?

If non-exempt, the trustee may liquidate cryptocurrency for creditors. If it qualifies for exemption or falls within limits, you may be able to keep it.

What happens if I forget to list my cryptocurrency?

Failure to disclose can be considered asset concealment. This may result in denial of discharge or fraud charges, creating serious long-term consequences for your case.

How does the IRS treat cryptocurrency in bankruptcy?

The IRS views crypto as property. All gains, losses, and mining income must be reported. Tax rules continue to apply even during bankruptcy proceedings.

Conclusion

Cryptocurrency is treated as property in bankruptcy and must be fully disclosed, accurately valued, and properly managed. Its volatility, tax treatment, and storage requirements make it more complex than traditional assets, but with preparation, it can be handled effectively.

Debt Advisors Law Offices has guided many Wisconsin residents through bankruptcy, including cases involving cryptocurrency. By staying compliant with disclosure laws, IRS rules, and exemption planning, you can move forward with confidence and a stronger financial future.